Netflix's $1.81 billion Q1 disappoints markets

Signups are growing, but cash is hard to come by

Netflix is pleased with its first quarter results, but has warned it will face headwinds in Q2.

Its first quarter 2016 results (PDF) showed revenue at US$1.81 billion, strongly ahead of last year's $1.4 billion first quarter.

That result fell short of the $1.97 billion analysts had expected, and its forecast of $1.96 billion for Q2 has also disappointed markets, knocking 12 per cent off Netflix's share price.

The content-streamer's international expansion has also taken a bite off Netflix's profits, with operating income down from $97 million in Q1 2015 to $49 million for Q1 2016.

Imminent competition from Amazon's Prime streaming offering at $8.99 per month, is another factor.

And then there's the risk of customer churn in the US in coming months, when the company's most popular $7.99-per-month plan to be “grandfathered”.

As the company notes in its letter to shareholders, the subscriber spike it experienced in Q2 last year after launching in Australia and New Zealand isn't going to be repeated; and because its Q1 2016 launch in 130 countries gave it a bunch of new non-US subscribers.

Its international efforts mean 42 per cent of subscribers are now outside the US.

As a result, new subs in Q2 will suffer a “tough comparison” with 2015, and there will be a sequential slowdown compared to the first quarter this year.

After laying on 6.74 million new subscribers in the first quarter, Netflix is predicting a much weaker 2.5 million net adds in Q2.

To try and restart global growth, there's to be more non-English-language content, the company says, with upcoming productions in French, Japanese, Italian, German and Spanish.

Since so many potential subscribers in markets like the Asia-Pacific are on mobile infrastructure, Netflix says it will invest in development of appropriate codecs.

Neflix also plans to use High Dynamic Range (HDR) in more productions, for those who have laid out on the next round of TV obsolescence.

The report also notes that this quarter, Netflix introduced a new codec which it says delivers either improved quality or a 20 per cent reduction in data volumes (depending on whether the subscriber is “bandwidth-limited”). ®

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